What do the Mid-East and Mid-West have in common?

What do the Mid-East and Mid-West have in common?

Eric Linser, CFA | Mar. 2, 2011

Answer: Political protests!

While each participant has different political agendas, the commonality I see is contagion, or the spread of unrest.

In the Mid-West, particularly Wisconsin, a battle rages over public sector finances. Elected officials are pushing to eliminate or weaken collective bargaining by government employees’ unions with the goal of saving millions of dollars now, and billions of future retirement and post-retirement benefits, to increase government’s flexibility to run its operations. I suspect that in the end, there will be compromise and both sides will claim they got something they wanted.

In the Mid-East and North African countries (MENA), the issue is a different take on politics – political freedom from autocratic control, and centrally planned economies that don’t provide for their people.

The Digital Revolution Begins Now
Firmly within the 21st Century, we have witnessed our first digital revolution propelled by the use of social media. In Egypt, the revolution, at least partly, began with the creation of Facebook groups that gained hundreds of thousands of members and promoted the early protests in Cairo.

In real-time on Twitter, Facebook, and YouTube we can all be witness to these historic events unfolding. Social media, mobile devices and the web bring the stories closer to home. We’ve seen a validation of “digital revolution” tools for both organizing and informing people through decentralized communications and increased transparency. It’s pretty amazing and powerful technological change that’s underway.

In the mean time the Mid-East is a powder keg that equates to uncertainty.

Uncertainty brings Opportunity
How does this directly affect you and me, especially regarding making smart investment decisions? “Oil Spike” opportunities can run the gamut: energy companies that operate outside the MENA region; American exploration & production (E&P) companies; natural gas; coal; nuclear; alternative and renewable energy; as well as unconventional energy plays; and technological advancement.

California gasoline prices in July 2008

This is just another wake-up call that we must move away from our addiction to crude oi, and in particular, from our dependency on the Mid-East to fulfill our thirst for oil. Sooner or later, this will no longer be a “spike” and we’ll look back on $3/gallon as the good old days.

US Stock Rally
Even with the sell-off in stocks as of late, February was an “up” month for the staid developed markets — US, Europe and Japan – making it the 3rd month in a row.

The US and most developed markets have moved resoundingly higher over the past few months, while emerging markets have sold off. Investors aren’t waiting around to find out how these developing countries will respond to inflationary threats, and instead are preferring to repatriate their monies and invest in tried and true Blue Chips.

Bears Awaken from Hibernation
The oil shock has awakened the bears. Economist Nouriel “Dr. Doom” Roubini will happily point out that spikes in energy prices related to wars or conflict in the Middle East preceded 3 of the last 5 global recessions.

The speculative fervor that oil prices experienced in the summer of 2008 showed us that demand becomes quite sensitive to oil prices (at prices above $100 per barrel, and crippling nearing $150), partly because very high oil prices tend to deflate economies heavily dependent upon oil imports.

The recent pullback in stocks is making many nervous. It can cause investors to lose conviction in the securities they’re holdings, especially the ones that have moved up the quickest have seemed to pull back the most.

It makes investors wonder if they should take their money off the table and put it into other asset classes, employ a different strategy, or cash out. I recommend not trying to read too much into the moves, just hold on and don’t panic. When the “risk on” trade happens again, these stocks should move up nicely.

Where does the market go from here?
Technically speaking, Dow 12,000 becomes our new support level; I highly doubt we will fall much below that level. I expect the market to be range bound for a while until we see how geo-political events locally and around the world play out.

Pausing to consolidate gains that we’ve made over the past 6-8 months isn’t necessarily a bad thing; it’s a healthy thing to do before making new highs. Heck, the S&P 500 is up 26%+ in the past 6 months, and is probably on its way to doubling from its March 2009 lows sometime this year.

Earnings will be what drive individual stocks higher, and we won’t get 1st quarter earnings until mid-April which probably means the markets will meander until we get better “reads” on the how the US economy is progressing.

One by one, economic and market indicators have returned to levels that prevailed before the Lehman Brothers meltdown in 2008, effectively turning back the clock on some of the worst effects of the financial crisis. The fundamentals of the US economy continue to improve, and I expect the economy will continue to push ahead in spite of the many headwinds it faces.

“I get knocked down but I get up again, You’re never gonna keep me down. I get knocked down but I get up again, You’re never gonna keep me down.” ~ Chumbawamba, Tubthumping(1997)

For me there is little doubt that the US economy is on track to deliver strong corporate earnings and attractive returns in the months ahead. And, there are no serious fundamental problems that elicit being out of the market.

But there is a caveat – No matter how strong the economy is now, the specter of $5/gallon for gasoline could be a “black swan” we definitely don’t need to see. It bears watching, but my thinking is that the current shock ($100/barrel & $3.65/gallon) isn’t large enough to derail the recovery.

I fully anticipate that the stocks we hold for clients will again be offering up some nice gains, especially when we look out over the course of the full year, and next. And if you aren’t invested with us, then now is a good time to look over our stock portfolio offerings and get in at discounted prices. (click the link for the US-focused Eagle Portfolio or for the global, go-anywhere Owl Portfolio or read here for our more nuanced multi-asset class 4 Seasons Portfolio approach).

Inspirational Quote

“A good leader can engage in a debate frankly and thoroughly, knowing that at the end he and the other side must be closer, and thus emerge stronger. You don’t have that idea when you are arrogant, superficial, and uniformed.”